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Euro adoption for Latvia in 2014 within reach.

   

The government of Latvia has set 1 January 2014 as the target for the adoption of the euro. Despite of all the recent negativity why should Latvia still join with Euro? According to Latvian Prime Minister Valdis Dombrovskis, joining the euro will boost trade, reduce transaction costs, improve foreign investment and make travel easier. He added that early in 2013, the government will ask the European Central Bank and the European commission for their assessment of Latvia's fitness to join the single currency, apply for membership, and hope to join neighbouring Estonia in the euro by the beginning of 2014. Hereby lets take a closer look at the conditions to join the euro and Latvia current progress in achieving the goal.

The European Union (EU) Member States which have not joined the euro-area, yet, have to comply with several conditions to adopt the single currency or the so-called Maastricht criteria. Criteria are the following:

  1. Inflation rate should be no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year
  2. Budget deficit must generally be below 3% of gross domestic product (GDP);
  3. National debt should not exceed 60% of GDP;
  4. Long terms rate should not be more than two percentage points above the rate in the three EU countries with the lowest inflation over the previous year;
  5. National currency's exchange rate should have stayed within +/-15% margins set within the Exchange Rate Mechanism fluctuation for two years before joining the euro area.

The main objective of the Maastricht criteria is to ensure that only those EU Member States join the euro area whose economic conditions ensure price stability and effective functioning of the euro area. To decide on Latvia's readiness for the euro changeover, the EC and the ECB, following the Government's proposal, will draft the convergence report: an assessment on the country's maturity for participation in the EMU. In the event of positive assessment Latvia will join the EMU and introduce the euro as a legal tender in the country.

How well has Latvia performed so far?

Compliance with Maastricht criteria - Latvia's data in November 2012

 

Convergence criteria

Criteria in November 2012

Latvia's achievement in November 2012

Budget balance (% of GDP)

-3,0

-3,4*

Government debt (% of GDP)

60,0

42,2

Average inflation over last 12 months (%)

2,8

2,5

Government securities long-term interest rate (%)

6,1

4,8

Currency exchange (%)

+/-15

0

 

 

As we can see from the table above Latvia has fulfilled almost all the Maastricht criteria (*Latvia's budget deficit is forecast to fall well below the threshold of 3 percent of GDP in 2012 and even further in 2013), so there is a green light to go on. Currently Latvia is on the right track on adopting the euro, however, there are some concerns that might have an affect on this goal. A survey carried out in autumn by research company TNS shows that the Latvian public is rather cautious about accepting EUR. Just one third of the respondents replied that Latvia should join EUR. So, instead of the European Commission, the Government of Latvia has more difficulties to convince the people that the euro is a good idea. True, Euro referendum is not mandatory, but in order to secure the political stability it would be better for Dombrovskis government to take firmer steps to popularize the euro.

Sources:

www.guardian.co.uk/world/2012/sep/19/latvia-keen-join-euro

www.eiro.lv/eng/the_euro/euro_changeover_in_latvia/compliance_with_maastricht_criteria